Monday, December 27, 2010

U.S. markets were little changed today, seemingly unaffected by China's interest rate hike on Saturday. The Dow fell 20.73 points or 0.18% to 11,552.76, while the S&P 500 rose 0.74 points or 0.06% to 1,257.51.

Last week, US markets were up on positive US economic data. For the week, the S&P 500 gained 1%, while the Dow was up 0.7%. It was the 4th straight week of gains for the S&P 500 and the Dow. As of Friday, the S&P 500 had been up 6.5% so far in December, with gains of 12.7% for 2010.

Positive economic data last week included initial jobless claims, which fell slightly by 3,000 people to 420,000. GDP for the July to September quarter was also revised upwards from 2.5% to 2.6%. A report Thursday also showed Americans increased purchases for a 5th consecutive month in November, while capital goods orders by companies increased.

China raises rates and buys Portuguese bonds

On Saturday, China raised its interest rate by 0.25%. It was the second rate hike in two months, and the 6th time that the Chinese Central Bank has intervened in the past 3 months. The benchmark lending rate was increased by 0.25% to 5.81%, while the deposit rate rose 0.25% to 2.75%. Most analysts were surprised, since they were not expecting a rate hike for the remainder of 2010.

China also reached a helping hand to the euro zone. A Portuguese newspaper reported last week that China was preparing to buy $4 to $5 billion euros of Portuguese government bonds. Portugal, along with other PIIGS nations, have been seeing the yields on their government bonds reach record highs in recent months, as investors perceive an increasing chance of default.

Unrest continues in the euro zone

As austerity budgets are pushed through across the euro zone, and citizens begin to feel the impact, unrest continues to remain in the region. Last week, Greece passed an austerity budget for 2011. Metropolitan transport workers conducted a 24-hour strike, causing traffic jams. National railway workers also went on strike, paralyzing train services.

Lookahead for this week

As 2010 draws to a close, investors have become very bullish in recent weeks. A year that has started relatively rough for the markets has now seen US markets up over 12%. Last Friday, the volatility index fell 10% to 16, its lowest level since April. Not surprisingly, early April was a high point for markets, after which they fell on the Greek crisis.

On December 23rd, the American Association of Individual Investors' survey found bullish sentiment increased 13.1% to 63.3, which was a 6-year high. According to Bespoke, bullish sentiment reached a historical extreme last Thursday. As a result, investors should not be surprised to see most analysts at the major banks predicting 10% plus gains for markets in the upcoming year. However, it is precisely these overly bullish sentiment that point to a near-term correction.

In fact, after the Santa Clause rally ends and 2010 draws to a close, investors will be faced with an increasingly tense debt crisis in the euro zone, as citizens react to austerity budgets. Billions of euros of government bonds will also need to be auctioned in early 2011. In addition, with China experiencing 5% plus inflation, investors can expect further tightening measures in 2011, with 3 to 4 interest rates hike for the year.

Monday, December 20, 2010

The S&P 500 edged higher to another 2-year high today, as the index rose 3.17 or 0.25% to 1,247.08. Meanwhile, the Dow slipped 13.78 or 0.12% to 11,478.13. The S&P 500 is up 5.7% so far in December, and 11.8% in 2010.

The S&P 500 rose 0.3% last week, while the Dow gained 0.7%. It was a week in which a list of US data either met expectations or were better than expected. The list included consumer spending, manufacturing indices and initial jobless rates.

As a result, analysts are turning increasingly bullish on upcoming US economic growth. For example, Bill Gross of PIMCO stated that fourth quarter US economic growth will be 3% to 3.5%, while Alan Greenspan sees US GDP growing 3% to 3.5% in 2011.

Euro zone crisis continues

Investors continue to pay attention to the euro zone. While negative news continue to emerge, developments there have not been large or negative enough to push markets lower. Today, Moody's downgraded 4 Irish banks and an insurer. This followed Moody's move on Friday, downgrading Ireland's credit rating by 5 notches, from Aa2 to Baa1.

Last Tuesday, the euro zone avoided further crisis when Italian Prime Minister Mario Berlusconi survived a confidence motion by 3 votes. On the same day, the S&P 500 warned that it could cut Belgium's rating. Later in week, Moody's put Spain's rating on negative watch. Meanwhile, strikes continued across Europe, as workers and tax-payers resisted austerity budgets. Protests have been particularly bad in Greece and the UK.

Outlook for the week

If negative news coming out of Europe continues to be too insignificant to weigh on markets, then North American indices can continue to rally on bullish sentiment and positive US data. However, investors will face a rude awakening in January at the latest, when the situation in the euro zone continues to deteriorate. In addition, with inflation at 5%, China needs to raise its interest rate 3 to 4 times next year even if it leaves rates unchanged for the rest of 2010. This represents another negative impact looming for markets.

Thursday, December 16, 2010

After rising over 40% since August 31, shares of RIMM have fallen in recent days. On Dec. 15, RIMM closed at US$59.18. It has fallen 7.44% since hitting $63.94 on Dec. 1.

Many analysts have been issuing bearish reports in recent days ahead of earnings, helping to push shares lower. However, despite bearish analysts painting a grim picture for RIMM in 2011, they see RIMM performing very strongly in Q3 results that will be announced after markets close today.

For example, analyst Jim Suva from Citigroup is one of the bearish analysts, with a US$55 target price on RIMM. However, he still sees strong Q3 results, with EPS of $1.62, which is only $0.02 below consensus.

We believe investors may be overlooking RIMM’s smart phone market share losses (15% globally vs. 21% a year ago) which we believe will become more evident in the quarters ahead as Android gains more traction (especially in Europe), enterprises unlock from BlackBerry exclusivity (1H 2011), Verizon (RIMM’s largest carrier at 16% of RIMM sales) getting the iPhone, & what we believe will be a highly competitive tablet market (iPad+Android+white box) resulting in lower margins, developer confusion with & higher costs with RIMM running 2 operating systems.

Suva is also forecast RIM's EPS in 2011 to be $5.12, versus $5.99 in 2010. Thus, he is seeing a 14.52% drop in earnings in 2011 compared to 2010. This would be a strong reversal to the 20%+ increase in earnings and revenue that RIMM has been enjoying for years.

QNX will save the day

However, these analysts do not realize that their fear of RIMM's sales dropping significantly in 2011 will not materialize. This is because RIMM is expected to begin launching handsets running on the QNX OS beginning in the second half of 2011.

These handsets, some of which will have dual-core processors, will run on the QNX OS that powers the PlayBook tablet. The micro-kernel architecture of the QNX OS means that it was designed from inception to support multi-tasking and multi-core processors. It also delivers high performance and is extremely reliable. For example, it currently powers nuclear powerplants from AECL and Westinghouse, the robotic arm of the space shuttle and unmanned aerial vehicles.

A bargain ahead of earnings

For investors who can stomach the risk, RIMM is clearly a bargain ahead of earnings. With the PlayBook launching in Q1 2011, RIMM will be getting a completely new revenue stream in the tablet market.

In addition, the migrating of handsets to the QNX OS means that the drop-off in earnings that bearish analysts predict, will actually not materialize. With consensus EPS for next year at $6.41, shares of RIMM at $59.18 means a 9.23 times multiple for next year's earnings. That is a true bargain for investors who see continued revenue and earnings growth of 20% plus in 2011.

Monday, December 13, 2010

North American markets changed very little on Monday, as the Dow gained 18.24 or 0.16% to close at 11,428.56, while the S&P 500 rose a mere 0.06 points to 1,240.46. Today, investors were mostly focused on further tightening in China. The Santa Claus rally also appears to be losing steam, as the euro zone debt crisis persists.

On Friday, the S&P 500 rose 0.6% to 1,240.4, its highest close since mid-Sept. 2008. Meanwhile, the Dow gained 0.35% to 11,410.32. For the week, the Dow rose 0.2%, while the S&P 500 gained 1.3%. Late last week, U.S. December consumer sentiment was better than expected, and hit the highest level in 6 months. The country's trade deficit also dropped more than expected in October.

China tightens on strong growth

On Saturday, China reported November CPI of 5.1%, which was higher than expected. It was also greater than the previous month's reading of 4.4%, and was a 28-month high. The Chinese Central Bank had raised the reserve requirement ratio (RRR) for banks by 50 bp (basis points) ahead of the announcement.

Euro zone worries still present

The euro zone debt crisis continues, as protests and strikes continue to occur in some countries. Germany also continues to refuse to use its taxpayer money to assist other euro zone members. For example, Angela Merkel is resisting calls to increase the size of the $750 billion euro bailout fund. She has also pushed repeatedly for investors of PIIGS nations' government bonds to take losses in any debt restructuring.

These comments by Germany, the largest economy in Europe, has spooked investors repeatedly in recent weeks. On Friday, the spread between the Portuguese and German 10-year government bonds increased 18 bp to 346 bp. The same spread between Irish and German bonds rose to 540 bp. It is believed that the ECB has slowed in its purchase of government bonds from PIIGS nations.

Outlook for this week

With analysts believing that China could raise its interest rate before the end of the year, and the euro zone debt crisis far from over, investors should expect markets to head lower this week. In fact, analysts expect the Chinese Central Bank to raise its interest rate 3-4 times next year, which could weigh on markets particular in the beginning of 2011.

The Santa Claus rally appears to be running out of steam, as it becomes overwhelmed by news from the euro zone and China. The S&P 500 is also running into technical resistance, as it reached its highest level since mid-Sept. 2008. However, investors should expect gold to outperform, as euro zone worries persist.

It is unusal for an analyst to raise a company's target price significantly, and yet downgrade their rating. But that is exactly what McKechnie did, raising RIMM's target price by 16.67%, while downgrading the stock to Neutral.

The analysts increased their price targets due to their improved outlook for RIMM in Q3 and Q4, due to strong sales of the Torch, Bold 9780, Curve 3G and the Style.

For example, McKechnie's Q3 earnings estimate is above the Street's (EPS of $1.69 versus consensus of $1.63). In addition, he raised his Q4 estimate.
However, these analysts downgraded RIMM because of their pessimistic outlook for the PlayBook, QNX OS and competition.

It is questionable for McKenchie to use the term "upgrade cycle", since even he states that smartphone shipments will increase 31% in 2011.

What is happening is that feature phone (non smartphone) users are dumping their phones for a smartphone. This is not only happening in the U.S., but actually at a quicker pace in other regions, such as Middle East, South-East Asia, Latin America and South America. The pace is only going to increase. In fact, many research firms estimate that by mid-2011, half of cell phone users in the US will be carrying a smartphone.

RIMM is taking advantage of this growth. An article in Bloomberg on Nov. 11 showed that RIMM is currently the number 1 brand in Latin America, beating out Apple's iPhone. The resolution of encryption issues with the UAE and Saudia Arabia in Oct. means that RIMM will continue to be highly popular in the Middle East. Meanwhile, RIMM continues to be extremely popular among other countries in Latin and South America, such as Mexico, Venezuala and Brazil. Furthermore, RIMM is promoting the BlackBerry as a consumer device in China (currently mostly used by enterprise users) which opens up a market of 1.3 billion consumers.

In other words, the "upgrade cycle" that McKenchnie states is actually non-existent. Smartphone sales will continue to grow at 25 to 35% in the forseeable future, while RIMM's revenue and earnings will continue to grow at 20% plus.

PlayBook and QNX OS

Unlike analysts who have a $90 target price for RIMM, these analysts are far more pessimistic on the PlayBook and QNX OS. For example, McKechnie states that QNX is not a "game changer". Fox shares a similar view, saying that the PlayBook will have "limited" EPS impact.

Thus, to some analysts, a tablet that beats the iPad in every specification is not a "game changer" (e.g. front- and rear- facing cameras versus no cameras at all, 4 times as much RAM as the iPad, etc).

In addition, they believe that the first available professional-grade tablet, with legendary RIMM encryption, and an operating system that also powers the robotic arm on the space shuttle, nuclear powerplants from AECL and Westinghouse, and unmanned aerial vehicles currently in combat in Afganistan, will have "limited" EPS impact. Afterall, the QNX OS was designed from inception to multi-task, be reliable, high performance and support multi-core processors.

Their tortured logic doesn't end there. According the Barron's, Townsend states that "the use of the QNX operating system makes the device significantly different from a BlackBerry so that corporate IT manager’s won’t rush to embrace the thing out of loyalty to the existing platform."

Thus, what Townsend implies is that IT managers will be willing to switch from the Blackberry platform to a new platform (i.e. to the iPad or Android) but not to the newer Blackberry QNX OS, out of loyalty to the existing Blackberry platform. If this does not make any sense to you, don't worry, because by definition, it does not make any sense.

RBC analyst offers hope

Thankfully, not all analysts are clueless. RBC Capital Markets analyst Mike Abramsky today reiterated his "Top Pick" rating and $90 target price for RIMM. He also published a 14-page note about the QNX Tablet OS. He states QNX will “deliver a powerful, fast, true multitasking tablet and smartphone experience”. He also sees the PlayBook appealing to enterprise, "pro" consumers (such as avid gamers) and people with greater productivity demands that cannot be satisfied by the iPad and other tablets.

For more reasons why RIMM will outperform in the months and years ahead, take a look at 5 Reasons to Buy RIMM Now, published on Nov. 14.

Monday, December 6, 2010

North American markets closed lower today on continuing concerns over the euro zone debt crisis. The S&P 500 fell 0.13% to 1,223.12, while the Dow fell 0.17% to 11,362.19. Last week, markets made strong gains despite euro zone troubles. For the week, the S&P 500 rose 3%, while the Dow rose 2.6%.

News from Germany helped to push markets lower, as Germany rejected calls by other euro zone countries to increase the size of the $750 billion euro bailout fund.

Gold shines

Spot gold rose to an all-time high of US$1,429.4/ounce today. Meanwhile, US December gold futures rose $9.90 to settle at $1,416.1/ounce. Gold rose today due to Ben Bernanke's interview on 60 Minutes, in which he discussed possible further quantitative easing beyond QE2.

Last week, gold also made gains. It rose 1.2% on Friday to $1,406/ounce. For the week, gold was up 3.1%. This was caused by euro zone woes, and the ECB's decision to support troubled euro zone countries using essentially quantitative easing measures.

Contagion spreads

Early last week, contagion in the euro zone spread from the riskier PIIGS nations to other countries. Belgium saw its spread against German government bonds rise. Belgium was targeted because of its 118% debt-to-GDP ratio, one of the highest in the euro zone. In addition, its government is considered to be unstable. Meanwhile, Italy became the next country in the centre of attention after Ireland, Portugal and Spain, as the nation's government bond spreads also rose.

Encouraging economic data

By the middle of the week, good economic data from China and other countries offset euro zone woes. For example, China's November PMI rose for 4 months in a row to 55.2, better than the 54.8 that markets expected.

ECB intervenes

On Thursday, the ECB announced measures to help the troubled PIIGS nations. The measures largely involved buying government bonds of the troubled countries. Thus, the measures are a form of quantitative easing, and the announcement pushed the price of gold higher.

The week ahead

With the euro zone debt crisis far from resolved, investors can expect markets to head lower this week. With Ireland having accepted a $85 billion euro bailout package, investors are now focused on Portugal, Spain, Italy and even Belgium. However, negative news can still emerge from Ireland, since the details of the bailout package have yet to be decided. In addition, the situation in Spain has been relatively stable, which leaves room for significant negative news to emerge. Thus, investors should expect gold to continue to outperform for the rest of the year.

Investors should also keep in mind that it is now the second week of December, so the Santa Claus rally is in full swing. In fact, positive sentiment last week limited falls due to euro zone concerns.

Tuesday, November 30, 2010

Shares of RIMM surged 4.81% today to close at US$61.83. Intra-day, the shares were up as much as 6.63% to US$62.90. The big move up was due to Jefferies and Co. analyst Peter Misek upgrading RIMMfrom a "hold" to a "buy", and raising his target price dramatically from US$55 to US$80.

Misek cited three reasons for his upgrade: QNX OS being better and available earlier than expected, strong international sales and slower enterprise share loss than expected.

Two of the reasons that Misek cited for his optimism on RIMM (the merits of QNX OS and strong international sales) were also stated in my Nov. 14 article 5 Reasons to Buy RIMM Now. Since that article was published on Nov. 14, RIMM has risen 5.15%.

Misek's 45% hike to his target price on RIMM is contrary to many other analysts on the Street. In recent weeks, analysts have been hiking their EPS estimates on RIMM due to expected sales of the PlayBook. However, the rising EPS estimates have not resulted in increased target prices or ratings.

In fact, Stifel Nicolaus cut its rating on RIMM from a "buy" to a "hold" on Nov. 17, and Kaufman Bros. did the same on Nov. 9. Peter Misek deserves credit for seeing past the media and the tech community's obsession with Android's growth, in order to realize the multi-tasking, performance and reliability of the QNX OS.

Monday, November 29, 2010

North American markets continued to fall on Monday, as investors continued to remain worried about the sovereign debt crisis in Europe. The S&P 500 was down 0.14 points to 1,187.76, while the Dow fell 39.51 points to 11,052.49. Last week, North American markets were also down on contagion fears, despite encouraging employment and GDP data from the US. For the week, the S&P 500 fell 0.86%, while the Dow dropped 1%.

Despite Ireland having agreed to a bailout package, and the EU today agreeing on a $85 billion euro package, it is obvious the euro zone situation is far from over. The details of the Ireland package still needs to be decided, and the coalition Irish government could be facing an election at any time. In addition, investors believe that after Ireland is successfully bailed out, Portugal will be next. This process could take several weeks to play out.

Finally, Spain could also require a bailout. Despite the Spanish Prime Minister stating adamantly on Friday that his nation does not need to be rescued, investors are showing that they believe otherwise, pushing the spread on Spanish government bonds to record highs. Since Spain's economy is 70% larger than Greece, Ireland and Portugal combined, the $440 billion euro EFSF is adequate for a bailout of Spain.

Looking ahead to this week

With the sovereign debt crisis in Ireland, Portugal and Spain expected to drag on longer, North American stock markets will likely head lower this week. It is worthy to note that before markets began to correct in November because of news from the euro zone, markets were clearly in overbought territory. However, markets have not fallen much from their November highs, meaning that there is still room for markets to head lower.

Wednesday, November 24, 2010

Yesterday, North Korea fired several hundred rounds of artillery onto a South Korean island. As a result, gold rose over 1% for the day. At 3:50pm EST, gold futures were up 1.3% to US$1,375.4/ounce. Earlier in the day, it was as high as over $1,382.

Today, the situation is calming on the Korean Peninsula. However, the euro zone crisis continues. Investors are now looking beyond Ireland to the next shoe to drop. Concerns about Portugal and Spain's sovereign debt situation are pushing the countries' government bond spreads to record highs. For example, Spanish spreads over German debt are at a record high of 230 basis points.

If the situation in Greece in May was any indication, the situation in Ireland, Portugal and Spain are not going to be solved quickly. Thus, investors can expect euro zone worries to drive equities lower and gold higher in the coming week.

Monday, November 22, 2010

Today, Oppenheimer & Co. analyst Ittai Kidron became the latest analyst to factor in sales of the PlayBook. He expects RIMM to sell 100,000 PlayBooks in the fiscal 4th quarter (December to February) and 3.2 million tablets in fiscal 2012 (March to February 2011). Thus, he raised his next year EPS estimate by $0.55, from $6.60 to $7.15.

This follows TD Securities' Chris Umiastowski, who on Nov. 12 factored in RIMM selling 3.6 million PlayBooks in FY2012. He raised his next year EPS estimate by $0.50, from $6.71 to $7.21. As this blog mentioned on Nov. 14, most analysts had not modeled sales of the PlayBook into their estimates for RIMM. Thus, I stated that investors can expect a wave of EPS estimate increases.

To date, about 3 analysts have incorporated the PlayBook into their estimates for RIMM. Thus, more EPS estimate increases ahead are imminent, with most of the 30 plus analysts covering the company to yet model in the tablet.

With RIMM still currently trading at a low valuation, and more news about the PlayBook to emerge in the weeks ahead, investors can expect the shares to continue to go up. My 12-month target price for the shares is US$90. To show how under-priced the shares currently are, applying a 14 times multiple to Oppenheimer's EPS of $7.15 gives a share price of US$100.1, while TD Securities' $7.21 EPS translates to a price of US$100.94 with a 14X multiple. The shares closed today at $59.30.

Sunday, November 21, 2010

North American markets ended the week flat. On Friday, the S&P 500 edged 3.04 points to at 1,199.73, while the Dow gained 22.32 points to end at 11,203.55. For the week, the S&P 500 was 0.04% higher, while the Dow was up 0.1%.

The S&P 500 has been down 2.1% in the last two weeks on Irish sovereign debt concerns and tightening in China. On Sunday, it was announced that Ireland has accepted a rescue package from the EU and IMF, though the size of the package has not been determined.

Meanwhile, China's central bank raised banks' reserve requirement ratio (RRR) by 0.5% this week, the second rise in two weeks. It was due to China's strong economic growth and high inflation. With the increase, the RRR for state-owned banks now stands at 18.5%, a record high.

Gold and other commodities fall

With tightening occurring in China, commodities headed lower this week on demand concerns. In terms of soft commodities, the price of soy beans fell 5.3% this week, while the price of rice fell 2.4%. Cotton also dropped 8% after rising 60% this year. Meanwhile, NYMEX crude fell 4% this week, while copper fell 2%.

Gold also fell, recording its second consecutive weekly decline. Its fall was due to the strengthening US dollar, as a result of debt troubles from Ireland. For the week, gold was down 1.2% to close at US$1,352.93/ounce.

The week ahead

Even though it was announced today that Ireland has accepted a rescue package from the EU and IMF, investors can expect some worries to remain, since the details of the package still need to be determined. In addition, it is believed that the EU will have to resolve the debt issues in Portugal and Spain next. Furthermore, with a red-hot economy and inflation pressures, further tightening measures can be expected in China. Thus, investors can expect markets to head lower this week. Investors will also be keeping an eye on retail sales, as we approach American Thanksgiving and Black Friday.

Sunday, November 14, 2010

North American markets fell this week, ending a 5-week streak of gains. For the week, the Dow and the S&P 500 were both down 2.2%. This was mostly caused by Irish sovereign debt concerns, and tightening by the Chinese Central Bank.

Trouble in Ireland

Troubles from Ireland emerged early in the week, as the spread between Irish and German government bonds hit one record after another. Markets also began to believe that the EU and IMF need to put together a rescue package for Ireland. Troubles from Ireland began to surface in early September with the nationalization of Anglo Irish Bank. This also reported on troubles from Ireland as soon as they surfaced. However, expectations for QE2 overshadowed euro zone problems in September and October.

Tightening in China

The Shanghai Index fell 5% on Friday, after rumours spread that China will raise the interest rate in the coming months. This followed the Central Bank's recent decision to raise banks' capital ratio by 0.5%. This also caused the Dow and S&P 500 to fall on Friday.

Gold falls

The price of gold fell this week along with other commodities. For the week, gold futures were down 2.3% and closed at US$1365.5/ounce.

Outlook for the week ahead

With sovereign debt troubles finally catching the market's attention, and tightening expected to continue in China due to strong GDP growth and inflation, this maybe the perfect storm that can send markets more than 10% lower. The situation in Greece in May showed that sovereign debt crises take a long time to resolve, due to politics and social issues. Thus, the debt trouble in Ireland is likely to also weight on markets for several weeks. In addition, Portugal is expected to be the next country to face a similar situation as Ireland.

RIMM's shares have been having a rough year. The rapid growth of Android devices, and the popularity of the iPhone have caused the Blackberry-maker's shares to be down 13% this year. In addition, certain countries in Asia have threatened to ban Blackberries due to their strong encryption. These factors caused the shares to trade at less than 8 times next year's earnings, when they hit the 52-week low of US$42.53 in August. This is despite the company reporting earnings growth of 76%, revenue growth of 34% and record shipments of 12.1 million phones in the latest quarter.

Since its 52-week low in August, the shares have risen 38% as of Nov. 12. This rise has been caused by agreements with countries on encryption, and more details about the PlayBook tablet. In fact, on Nov. 11, RIMM shares rose 6%, its biggest gain in 4 months, after the Co-CEO said the PlayBook would sell for under US$500 in the first quarter. The following are 5 reasons why the shares can still move much higher.

1) The Playbook will add as much as $1.00/share to RIMM's earnings

On September 27, RIMM showcased its first-ever tablet, the PlayBook. It has a 7” screen, runs on a 1GHz dual-core processor, has front-facing 5MP and rear-facing 3MP cameras, 4 times as much RAM as the iPad and twice as much RAM as the GalaxyTab. It will also run Flash, which the iPad does not. The PlayBook will launch sometime in the first quarter, and I expect it to launch in January.

Most analysts covering the company have not factored in sales of the tablet into their models. On Friday, TD Securities' Chris Umiastowski became one of the first analysts to model the PlayBook into their estimates. He expects RIMM to sell 3.6 million PlayBooks next year, and for the PlayBook to grab 6.6% of the tablet market share. As a result, he increased RIMM's FY 2012 earnings forecast from $6.71/share to $7.21/share, an increase of $0.50/share.

However, with Apple selling 4 million iPads every quarter, I believe even Chris Umiastowski, who is relatively bullish on RIMM compared to other analysts, is being conservative. The PlayBook beats the iPad on every specification. In addition, Android tablets such as the GalaxyTab run on Android 2.2, which even Google said is “not optimized for tablets”. Pent-up demand from enterprise customers using Blackberries and current Blackberry users should provide very strong sales for the tablet. In addition, the lowest model of the PlayBook being priced under US$500 will also help sales.

Thus, it is reasonable to expect RIM to grab more than 6.6% of what Gartner now expects to be a 54.8 million unit tablet market in 2011. For example, the PlayBook grabbing twice as much of the 6.6% market share that TD expects would mean that the tablet would contribute $1.00/share to earnings. RIMM has said that subsequent versions of the PlayBook will run on 3G and/or 4G, making this estimate even more realistic. In addition, most analysts have not yet modelled the PlayBook into their estimates. Thus, investors will see a wave of EPS estimate increases for RIMM in the weeks ahead.

Much of the analyst and media attention on RIM in recent months has been market share loss in North America, predominantly to Android phones. In fact, this is one of the main reasons why RIMM shares are down 13% year-to-date. RIMM has been losing market share in North America due to a lack of a high-end, pure touch-screen device. However, while RIMM is experiencing some market share loss in North America, the rapidly growing smartphone market, and international expansion by RIMM more than makes up for this loss.

First, the worldwide smartphone market is growing far faster than RIMM is losing market share in North America. For example, a report by Gartner on Nov. 10 showed that the smartphone market grew 96% in the 3rd quarter from a year earlier. Thus, despite all the concerns about competition, RIMM's share of the overall mobile phone market rose to 2.9% from 2.8% a year earlier.

In addition, RIMM's aggressive push into emerging markets has given it a large market share in these countries. An article on Nov. 11 in Bloomberg stated that IDC found RIM to be the number one smartphone brand in Latin America this year, beating Apple. In emerging countries such as Brazil, China, India and Mexico, most phone buyers choose the pre-paid option instead of going on a 2- or 3-year contract because of a lack of credit.

Thus, Blackberries have a significant advantage over the iPhone, since it costs about US$250 for a Blackberry Curve, versus US$700 for the iPhone. In addition, Blackberries also have the highly popular Blackberry Messenger (BBM) service, and use less data than iPhones or Androids. BBM allows users to save on their phone bill, by allowing them to instant message their friends for free instead of making a call. RIMM's continued dominance in Latin America and Indonesia, and a push into China and India means that RIMM will gain far more market share than it loses in North America.

3) RIMM's future prospects are better than what most people think

The rapid growth rate of Android devices in North America, and the iPhone's popularity have many people seeing a grim future for RIM. However, the upcoming Storm 3 and the PlayBook (both discussed in other sections) plus the QNX OS (operating system) will provide RIMM with a very bright future.

RIM purchased QNX Software Systems in April. The QNX embedded OS is currently used in Caterpillar machines, cars (including Audi, BMW and Porsche), defense systems, medical devices and nuclear powerplants (Westinghouse and AECL). The Tablet OS that is on the PlayBook runs on the same microkernel technology, making it built for multi-tasking and extremely reliable. Thus, the reliability that is used in the OS of nuclear powerplants will also be in the PlayBook's OS.

In addition to tablets, RIMM has said that it intends to put the QNX OS onto Blackberry smartphones. Blackberries running QNX OS are expected to launch by May 2011. Thus, in a few months, RIMM smartphones will have the multi-tasking, performance and reliability that is unmatched by the iPhone or Android devices.

4) Storm 3 will be able to compete with iPhone 4 and Android devices

The biggest reason why RIM has been losing market share to Androids and iPhone in North America is because of a lack of a high-end, pure touch-screen device. Storm 1 was too buggy, while Storm 2 has been on the market since Nov. 2009. RIM has been working on the Storm 3 for a long time. Since RIM has taken a leaf out of Apple's book, and is keeping the device under heavy secrecy, only one picture of the device has been leaked. The Storm 3 is expected to have a 3.7” screen, 1GHz CPU, 1 GB RAM and 8GB of storage, making it on-par with the iPhone 4 and various Android phones.

Since the Storm 1 came out in Nov. 2008 and the Storm 2 in Nov. 2009, it is logical that the Storm 3 will be launched around Nov. 2010. Apple has the same policy with the iPhone, with the iPhone, iPhone 3G, 3GS and 4 each being released 1 year apart. Thus, I expect the Storm 3 to be announced at CES 2011, which is taking place January 6-9. In fact, it has been shown in Verizon's leaked roadmap that there will be a 4G RIMM device on the network in early 2011. The announcement and launch of a Blackberry that can fully compete with the iPhone and Android devices should be a big boost to RIMM's shares.

5) Valuation

As mentioned previously, RIMM was trading at less time 8 times next year's earnings when it hit its 52-week low in August. The company is reporting significant earnings and revenue growth (76% and 34% growth respectively in the latest quarter). It has also been shipping record numbers of smartphones in recent quarters.

Consensus on the Street is for earnings of $6.28/share next year. That is for forecasts in which analysts have not yet modelled in the PlayBook. Even excluding the PlayBook, RIMM is trading at 9.36 times next year's earnings, far cheaper than Apple, Motorola and even Nokia. With a 14 times P/E ratio applied to EPS of $6.28, RIMM would be at US$87.92, which is 49.52% above the closing price on Nov. 12. Pricing in $1.00/share for the PlayBook gives EPS of $7.28, which gives the shares a price of $101.92 with a 14 times multiple. That is 73.33% above the closing price, making the shares very attractive at current levels.

A bargain with continued growth ahead

RIMM is a clear bargain at current prices. Pricing in $1.00/share in EPS for FY 2012 for the PlayBook means that the stock is trading at 8.08 times future earnings. This is significantly cheaper than peers such as Apple, Motorola and even the struggling Nokia. Despite all the media concerns about Android and Apple, RIMM's earnings and revenue are still growing at over 20%.

Takeover rumours are another catalyst for the stock. In August, takeover speculation once again circulated, as RIMM's price tag fell to $23 billion. The company remains affordable for Microsoft, Cisco and Oracle. For example, if Microsoft's Windows Phone 7 (WP 7) disappoints, Microsoft would have to acquire a smartphone company, and RIMM would be the best option. After the spectacular flop of Microsoft's Kin One and Kin Two in July, WP 7 is Microsoft's final chance in the smartphone market.

It is common knowledge that Microsoft prefers to succeed in the market with its own smartphones. However, if that does not work, it would have to acquire someone else. The fact that WP 7 lacks multi-tasking and copy-and-paste functions makes this possibility all the more likely.

Tuesday, November 9, 2010

Natural gas has been rising in the past week. Today, it broke above US$4, trading at US$4.14 after rising 1.27% at 9:30am. There are many reasons to go long on natural gas right now.

First, the price of natural gas has been tumbling in the past 12 months. With brent crude currently trading at US88.79/barrel, the ratio between oil and natural gas prices is as high as 21.45 to 1.

Second, seasonality will likely see natural gas trading much higher in the coming months. Consumption of the commodity rises every winter, as consumers in North America use natural gas to heat their homes. This always results in a spike in prices.

Finally, this is expected to be a colder winter then usual worldwide. A few weeks ago, European scientists predicted that this will be the coldest winter in Europe in 1000 years. La Nina is also expected to provide North America with a colder winter than normal. Signs of this colder-than-usual weather have already emerged. For example, the Toronto area recorded the coldest Halloween in 10 years.

I expect natural gas to hit US$6 before April 2011, and I have positioned myself and clients into the ETF HNU listed on the TSX.

Sunday, November 7, 2010

North American stock markets surged following US Federal Reserve Chairman Ben Bernanke's US$600 billion QE2 announcement on Wednesday. For the week, the Dow was up 2.93%, while the S&P 500 rose 3.99%. In fact, North American indices rose to their highest level since September 2008, when Lehman Brothers collapsed. In addition, the S&P 500 has gained about 16% since the beginning of September.

Apart from QE2, markets also got a boost from Friday's October non-farm payroll, in which 151,000 jobs were gained. It was better than the 60,000 job gains expected. In addition, September private sector job additions were increased from the original 64,000 jobs to 107,000. September job gains were also revised from a previous loss of 95,000 jobs to a loss of 41,000.

Gold hits another record high

Following QE2, the price of gold hit another record high on Friday, reaching US$1,397.7/ounce. It had pulled back 5% from mid-October to November 2nd, after its previous record high of US$1,387. However, QE2 is pushing the US dollar lower, which increases the prices of all commodities, including gold. Oil was also strong, as Brent Crude rose to $88.11/barrel on Friday, its highest level since September 2008.

The week ahead

QE2 is having the effect on stock markets that Ben Bernanke intended, which is to lift stocks higher so that Americans are wealthier, and can spend more. The depreciating US dollar and continued access to cheap money should continue to lift markets, especially as we head into the traditionally strong holiday season of November and December.

However, it is important to note that North American markets are in overbought territory, making it susceptible to short-term pullbacks. The S&P 500, for example, is more than 2 standard deviations above its 50-day moving average. Nevertheless, I expect North American equities to be 10% higher than Friday's close sometime before the end of December. I am also raising my forecast on gold by $20/ounce, as I am now expecting gold to be US$1,450/ounce before 2011 begins.

Thursday, November 4, 2010

After US Federal Reserve Chairman Ben Bernanke announced a US$600 billion QE2 yesterday, North American markets are significantly higher today. The S&P 500 rose 1.93% to 1,221.06, while the Dow jumped 1.96% to 11,434.84.

Gold surged 3% and broke through its October all-time high of US$1,387 today, going as high as US$1,393. In a post I wrote on Tuesday before the QE2 announcement, I stated "...due to QE2, I expect US equities to rally 10% sometime within the next 3 months. In addition, I expect gold to continue to rally, surpassing its October record high of US$1,387/ounce...My estimate is for gold to hit US$1,430/ounce by the end of 2010." It appears that those estimates are looking very good right now.

Tuesday, November 2, 2010

US Federal Reserve Chairman Ben Bernanke is expected to announce QE2 tomorrow (November 3rd). My expectation for QE2 is an announcement of US$80 billion to US$100 billion per month, totaling no more than US$900 billion. More importantly, I expect Ben Bernanke to promise further action if needed when QE2 expires. He may even state an estimate for the total amount for QE2 and QE2+/QE3, though that is less likely.

While QE2 will be much smaller than the US$1.75 trillion QE1, investors should not underestimate the willingness of "Helicopter Ben" (Ben Bernanke's nickname) to conduct quantitative easing.

As a result of cheap money due to QE2, I expect US equities to rally 10% sometime within the next 3 months. In addition, I expect gold to continue to rally, surpassing its October record high of US$1,387/ounce. In fact, US$1,400/ounce is an easily achievable level for gold before the end of 2010. My estimate is for gold to hit US$1,430/ounce by the end of 2010.

Sunday, October 31, 2010

North American markets were little changed this week ahead of a very important week. The Dow slipped 0.1% lower, while the S&P 500 moved up 0.02% for the week. Overall, October continued with September's impressive gains, with the Dow gaining 3.1% and the S&P 500 rising 3.7% for the month.

Early in the week, the end of the G20 summit and a lack of significant news from the summit gave traders the signal to continue selling the US dollar. As a result, the yen was at a 15-year high at 80.4 yen versus the US at one point in the week. The euro hit US$1.405, while the Australian dollar hit US$0.9954.

During the week, U.S. September pre-owned homes sales rose 10% to 4.53 million houses, the second consecutive monthly increase. US 3rd quarter GDP rose 2% over the same quarter in 2009, which was 0.3% higher than 2nd quarter's 1.7% growth. However, it was lower than economists' expectations of 2.1%. In addition, the Reuters/University of Michigan consumer index fell in October from 68.2 to 67.7.

Gold shines on Diwali

Gold rose 2.3% this week, breaking above the US$1350 level and ending the week at US$1357.59/ounce. Gold has fallen since hitting a record high of US$1387/ounce two weeks ago. Investors had become concerned about the size of QE2, and gold's rapid rise in recent weeks. However, it received support in recent days from the Indian Diwali Festival.

One very important week

Investors have arguably been looking forward to next week since Federal Reserve Chairman Ben Bernanke's statement on August 27th. Markets have climbed substantially higher because of expectations for QE2. In fact, the S&P 500 has gone up 8.8% in September and 3.7% in October, two traditionally poor months for stock markets.

In the early part of October, investors had priced in a QE2 of US$1 trillion to be announced November 2nd and 3rd. However, analysts and strategists have since stated that QE2 is more likely to be about $500 billion. In fact, recent reports have suggested that QE2 will be carried out over several months, and not in one big lump sum.

I wrote an article on this blog on October 17th stating that “an announcement for QE2 of less than US$1 trillion could leave investors disappointed and stocks heading lower”. That is exactly the same analysis that analyst Mark Faber reportedly stated this Tuesday, as well as many others. However, while most investors will likely be disappointed by a QE2 that amounts to no more than $600 billion in the first few months, the prospect of cheap money could see North American equities heading as much as 10% higher. In fact, that is partly the reasoning behind the US Federal Reserve's QE2, which is to increase Americans' wealth by driving stock markets higher with cheap money.

Gold will shine regardless of QE2's size

Regardless of the direction of North American equities post-QE2, it appears nearly certain that the price of gold will be heading higher. A large QE2 would certainly send gold skyrocketing because of a weaker US dollar, while a smaller QE2 could get investors worried about economic growth, thus sending their money into the safety of gold. I see the recent pullback in gold as a temporary breather, as investors wait and see what the US Fed does. QE2 is a certainty at this point. Thus, regardless of its size, gold will be continuing its uptrend for the rest of 2010 and into 2011.

Sunday, October 24, 2010

North American stock markets recorded their third consecutive weekly gain. For the week, the Dow and the S&P 500 were both up 0.6 percent. Markets were roiled on Monday after China's decision to raise interest rates by 0.25%. The move was aimed to steady the country's inflation rate. North American markets were also in a passive stance on Friday ahead of the G20 summit in South Korea.

Cotton soars

The price of cotton continued to soared this week, after US production was threatened by weather conditions. On Friday, December cotton futures rose 3.5% to close at US$1.1971/pound. For the week, cotton was up 9%.

Cotton price reached a 140-year high on October 15th, after hitting US$1.198/pound. Cotton's upward movement in recent weeks has been due to production cuts due to floods in China and Pakistan.

Gold falls 3.4%

The price of gold fell 3.4% this week to settle at US$1325.1/ounce, its biggest fall since early July. This was partly because China's interest rate hike has sent the US dollar up 0.7% this week. Gold hit a record of $1,387.1/ounce the week before, but have since fallen partly due to concerns that US quantitative easing (QE2) has been fully priced into the market.

The week ahead

Markets will likely focus on announcements from the G20 summit and the continued earnings season next week. In addition, investors will also be looking ahead to the Federal Reserve meeting on November 2nd and 3rd. The recent fall in the US dollar has analysts believing that the market has priced in US$1 trillion of quantitative easing (QE2). Thus, an announcement by Ben Bernanke for less than that amount could send markets lower. In fact, a report from the Wall Street Journal this week showed that the Fed may conduct QE2 over a period of months and in tranches, and not in one large amount.

Sunday, October 17, 2010

North American markets, which have been rallying since Ben Bernanke's speech on August 27th, appeared to lose steam this week. For the week, the S&P 500 was up 1% to 1,176.19, while the Dow edged 0.5% higher to 11,062.78. The S&P 500 has gained 12% since the end of August, reaching its highest level since May 3rd on Wednesday.

US dollar weakness continues

Quantitative easing (QE2) and U.S. dollar weakness continued to be the centre of attention this week. The US dollar fell to a 15-year low against the yen, the Canadian loonie jumped past parity, and the Australian dollar also rose past parity for the first time in 30 years.

Ben Bernanke stated on Friday that with US inflation being so low and unemployment at a high level, the US Federal Reserve will take further action. However, he did not give details about the size of QE2. Thus, the US dollar stopped declining on Friday, and rose slightly after his speech. Gold also edged lower to end at $1,368.26/ounce, after hitting another record high of $1,380.18 on Thursday.

Emerging Markets shine

With the promise of cheap money by the US Fed, investors poured money into emerging markets in an attempt to obtain faster growth and higher yield. According to Reuters, JPMorgan’s EMBI+ index showed investors buying up emerging markets government bonds. In addition, EPFR Global stated that at the end of last week, emerging market equity fund flows hit a 33-month high, and emerging market bond funds absorbed $1 billion in one week.

Housing turns ugly

The consistently weak US housing market got even uglier, as allegations grew that lenders have improperly seized hundreds of thousands of houses. In fact, Bank of America has stopped all sales of foreclosed houses. This is expected to halt a large portion of the US housing market for the next several months. In fact, one hedge fund has pointed out that Bank of America could face a loss of US$70 billion as a result of the incident. As a result, Bank of America and other US bank shares fell on Friday.

Trade war looking less likely

The possibility of a trade war between the US and China decreased significantly on Friday, after the US Treasury Department delayed a decision of whether to label China as a currency manipulator until after the November 2nd elections and the G20 summit on November 11th. However, tensions remain because of QE2 driving down the US dollar, making other currencies less competitive.

Outlook

With North American markets having gone up significantly, investors could be facing a rude awakening when the Fed announces further actions on November 3rd. With the S&P 500 having risen 12% since September began, investors are pricing in a US$1 trillion QE2 to be announced. However, to date, the US Fed has not given any indication about the size of QE2, and Friday's speech hinted that the Fed's action will be cautious. Thus, an announcement for QE2 of less than US$1 trillion could leave investors disappointed and stocks heading lower. In addition, with the steep rise in equities in recent weeks, markets will likely be trading sideways or slightly lower into the Fed's decision.

Sunday, October 10, 2010

North American markets were up this week, despite a very weak U.S. September jobs report. For the week, the Dow was up 1.6% and recorded its 5th weekly rise in 6 weeks. On Friday, the Dow also closed above 11,000 for the first time in five months.

While a worse-than-expected jobs report showing a loss of 95,000 jobs would usually push markets down, this week's report strengthened investors' belief of further quantitative easing (QE2) from the US Federal Reserve on November 2nd.

Another boost for markets was the earnings season. Alcoa rose 5.7% on Friday, after reporting better-than-expected earnings of $0.09/share, versus expectations of $0.05/share. The company also raised its 2010 estimate for world aluminium demand.

Commodities continue to shine

Agriculture stocks surged on Friday, after the US Department of Agriculture stated that the corn crop is going to be smaller than expected.

Oil also rose for the third week in a row to US$82.66. Meanwhile, copper rose 2.3% on the week to US$3.7745/pound. On the back of a weak US dollar, gold also continued its move higher, finishing the week up 2.1% at US$1345.3/ounce.

Euro zone steady

While downgrades by credit agencies continued for Ireland, the situation in the euro zone calmed significantly versus the week before. In fact, Germany's August industrial output rose 1.7%, much better than the expected rise of 0.1%.

Lookahead for next week

Earnings season continues next week, as GE, Google, Intel and JP Morgan Chase announce earnings. However, investors will likely pay most attention to the Fed, as the market anticipates a QE2 that amounts to US$500 billion. However, Fed action on November 2nd is not guaranteed, and the Fed could disappoint investors with a QE2 that is less than expected.

With the S&P 500 having gone up 8.8% in September, and more still in the early part of October, a pull-back is more likely than further gains. Even if markets were able to hold on to its gains and head higher for the rest of October, investors will likely be disappointed by the Fed's decision on November 2nd. In addition, the situation in the euro zone (Ireland in particular) could implode at any moment.

Sunday, October 3, 2010

North American stock markets edged lower this week, as the surprisingly strong month of September came to an end. The Dow slipped 0.3%, but the S&P 500 edged 0.2% lower. According to Reuters, the S&P 500 posted a 8.8% gain for September, making it the second best September on record.
The consumer confidence report announced on Tuesday was extremely dismal, as the index fell in September to its lowest since February. The consumer confidence index fell to 48.5 from 53.2 in August.

Gold shines once again

Gold continued to rally as it rose 1.5% for the week. Spot gold rose to a record high of $1,320.8/ounce, while US December gold futures went up to $1,317.8/ounce.

Good news from China

News from China helped to boost markets on Friday, as September PMI was announced to be 53.8 and better than expected. It was also 2.1 higher than August's reading, making it two months in a row that China's PMI has risen. Though it signals a strong Chinese economy, the reading is also raising interest rate hike worries among Chinese investors.

Trade tension between China and the US also continued to rise, as expected, as the US House of Representatives voted to amend the 1930 Tariff Act, in order to state that “fundamental exchange-rate misalignment” is a punishable subsidy. The measure was aimed at China, as US politicians continued to pressure the China currency ahead of the November mid-term elections.

Euro zone troubles continue

The situation in the euro zone turned increasingly ugly, as two more credit agencies warned on Tuesday that Ireland is at risk of more downgrades. That came after Moody's cut Anglo Irish Bank's lower-grade debt. As a result, Ireland's CDS, the cost of insuring Irish government debt against default, soared to a record high of 519 basis points (bp). Irish credit premiums also rose as the premium on the 10-year Irish government bond over the German bonds hit a record high of 475 bp.

Massive protests and strikes also occurred in the euro zone this week, as tens of thousands of workers protested in Brussels. Unions in Spain went on 24-hour strikes, crippling the train system and public transportation. Greece also faced similar strikes.

The week ahead

North American markets will face many economic data next week, including the non-farm payrolls report. Alcoa will also kick off the third-quarter earnings season on Thursday. Pending home sales and August factory orders will give markets direction on Monday, while the ISM services index is announced on Tuesday. The ADP payrolls report is released on Wednesday.

While markets have seemingly ignored the increasingly worse situation in the euro zone in September, that will unlikely continue in October. The worsening economic growth and social unrest in the periphery of the euro zone will likely begin to drag markets lower.

Meanwhile, trade tensions between China and the US will only increase as we near the November elections. Thus, while technical analysts see a potential for the S&P 500 to break out higher as it is currently near 1,150 points, October will more likely see North American markets end lower.